1 Bozt Inc is expected to grow by 5 next year If we expect t

1. Bozt Inc. is expected to grow by 5% next year. If we expect to pay a dividend of $50 per share next year, and our expected return on investments are ten percent, calculate the current stock price? 2. What if dividends are expected to decrease by 10 percent of what we expect to pay, what would then be the current stock price? 3. Given the following: Cost of Capital is 8 percent Year Project A Project B 0 $(45,000.00$(85,000.00 20,000.00 25,000.00 2 $ 150.00 25,000.00 3 $ 15,000.00 25,000.00 4 30,000.0025,000.00 10,000.0025,000.00 6 5,000.00 25,000.00 7 5,000.0025,000.00 If investments A and B are not mutually exclusive, and if the projects\' cash-flow streams are independent of each other, then: calculate the total NPV of both projects?

Solution

Answer 1.

Expected Dividend, D1 = $50
Growth Rate, g = 5%
Required Return, r = 10%

Current Price = D1 / (r - g)
Current Price = $50 / (0.10 - 0.05)
Current Price = $50 / 0.05
Current Price = $1,000

Answer 2.

Expected Dividend, D1 = $50
Growth Rate, g = -10%
Required Return, r = 10%

Current Price = D1 / (r - g)
Current Price = $50 / (0.10 + 0.10)
Current Price = $50 / 0.20
Current Price = $250